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What Caused Chicago Bank Failures in the Great Depression? A Look at the 1920s

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  • Postel-Vinay, Natacha

Abstract

This article reassesses the causes of Chicago state bank failures during the Great Depression by tracking the evolution of their balance sheets in the 1920s. I find that all banks suffered tremendous deposit withdrawals; however banks that failed earlier in the 1930s had invested more in mortgages in the 1920s. The main problem with mortgages was their lack of liquidity, not their quality. Banks heavily engaged in mortgages did not have enough liquid assets to face the withdrawals, and failed. This article thus reasserts the importance of pre-crisis liquidity risk management in preventing bank failures.

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  • Postel-Vinay, Natacha, 2016. "What Caused Chicago Bank Failures in the Great Depression? A Look at the 1920s," The Journal of Economic History, Cambridge University Press, vol. 76(2), pages 478-519, June.
    • Handle: RePEc:cup:jechis:v:76:y:2016:i:02:p:478-519_00
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    Cited by:

    1. Olivier Accominotti, 2019. "International banking and transmission of the 1931 financial crisis," Economic History Review, Economic History Society, vol. 72(1), pages 260-285, February.
    2. Macher, Flora, 2018. "The Austrian banking crisis of 1931: one bad apple spoils the whole bunch," Economic History Working Papers 87151, London School of Economics and Political Science, Department of Economic History.
    3. Cont, Rama & Kotlicki, Artur & Valderrama, Laura, 2020. "Liquidity at risk: Joint stress testing of solvency and liquidity," Journal of Banking & Finance, Elsevier, vol. 118(C).
    4. Todd Messer, 2022. "Financial Failure and Depositor Quality: Evidence from Building and Loan Associations in California," International Finance Discussion Papers 1354, Board of Governors of the Federal Reserve System (U.S.).
    5. Constantinescu, Mihnea & Nguyen, Anh Dinh Minh, 2021. "A century of gaps: Untangling business cycles from secular trends," Economic Modelling, Elsevier, vol. 100(C).
    6. Mitchener, Kris & Richardson, Gary, 2020. "Contagion of Fear," CEPR Discussion Papers 14510, C.E.P.R. Discussion Papers.
    7. Grodecka-Messi, Anna & Kenny, Seán & Ögren, Anders, 2021. "Predictors of bank distress: The 1907 crisis in Sweden," Explorations in Economic History, Elsevier, vol. 80(C).
    8. Quincy, Sarah, 2022. "Income shocks and housing spillovers: Evidence from the World War I Veterans’ Bonus," Journal of Urban Economics, Elsevier, vol. 132(C).
    9. Seán Kenny & Anders Ögren & Liang Zhao, 2023. "The highs and the lows: bank failures in Sweden through inflation and deflation, 1914–1926," European Review of Economic History, European Historical Economics Society, vol. 27(2), pages 223-249.
    10. Fishback, Price & Fleitas, Sebastian & Rose, Jonathan & Snowden, Ken, 2020. "Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 80(3), pages 853-885, September.

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